IMF finds signs of overvaluation in Canada housing

DonCurren

TORONTO--There are signs of overvaluation in Canada's housing market, and it appears to be concentrated in the more expensive end of the market, the International Monetary Fund said Tuesday.

"Housing has regained momentum, but with important differences across regions and markets," the IMF said. "House prices have reaccelerated, mainly driven by brisk activity in major metropolitan areas--notably, Toronto, Vancouver, and Calgary."

The Canadian economy performed relatively well over the past year, the IMF said in a report on the country. It projected economic growth of 2.25% in 2014, adding: "An awaited pick-up in exports has lifted activity, but rebalancing of growth away from household consumption and residential investment remains incomplete, owing to tentative business investment."

"Going forward, external demand from stronger U.S. growth should support above-potential growth and a broadening recovery," it said. The U.S. takes some three-quarters of Canada's exports.

Canadian policy makers have been looking to exports and business investment to drive economic growth given Canadians' high debt levels, accumulated over the past decade as rock-bottom interest rates fueled aggressive demand for homes. The state of Canada's housing market remains the subject of intense debate, with some analysts suggesting the market is over-extended and at risk of a sharp correction. Others maintain government efforts to rein in the market by tightening mortgage-insurance rules have helped stabilize the market.

"Although key domestic vulnerabilities in the housing market and the household sector can interact with adverse external shocks to harm growth, risks appear contained from a financial stability perspective," the IMF said.

The report said demand from household formation and population growth, combined with supply-side constraints from land-use policies and geography, may partly explain fundamental strength in real estate markets in Toronto, Calgary and Vancouver. Across market segments, single-family homes are a major source of price increases, it said.

The IMF said uninsured mortgages with low loan-to-value ratios are rising 10% a year and comprise the bulk of mortgage originations, indicating overvaluation is a particular concern for higher-end properties.

"Tighter mortgage insurance rules, reduced affordability, and new construction of multi-family units appear to have contained price growth in other market segments," the IMF said.

The IMF report praised the Canadian government's efforts to rein in the housing market but said "further action may be needed if household balance sheet and housing market vulnerabilities resume rising." The last mortgage-rule tightening was in 2012.

"Targeted actions could include tighter standards, such as lower amortization limits for uninsured mortgages," the report said. The maximum amortization for uninsured mortgages in Canada is 30 years; the maximum amortization for insured mortgages is 25 years.

The IMF also said action to further limit exposure of taxpayers to the housing market and encourage appropriate risk retention by the private sector would be desirable.

In its last policy statement in October, the Bank of Canada said the risks associated with household imbalances were "edging higher" after several months of indications they were heading in the right direction. On Monday, a report from Canada Mortgage and Housing Corp., the dominant mortgage-insurance provider in Canada, said there were signs of modest overvaluation in the housing market.

For the economy as a whole, the balance of risks is modestly tilted to the downside, the IMF said.

"A faster-than-expected tightening of global financial conditions and a further decline in global oil prices from weaker demand are the key external downside risks facing Canada," it said.

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